Advantages and Disadvantages to Annuity Purchase

Advantages:

• Buying an annuity is straightforward, with minimum paperwork, and no on-going reviews. An annuity is a simple product and easy to understand.
• You receive a fixed income for life, which cannot fall in value.
• You have no or limited exposure to investment risk.
• You can receive all of your tax-free cash lump sum at the start.
• There are a wide range of options which you can add to an annuity to include indexation, spouse's pension, guaranteed periods and frequency of payments.
• There are a wide range of types of annuity to suit varying risk tolerances. These include with profits annuities and unit linked annuities. You can also increase your income if you qualify for an impaired life annuity.
• If annuity rates fell in the future, income derived from a conventional annuity vested prior to a rate cut would not fall in value. With increased trends of longevity, this may represent good value compared to rates in the future. Even if future annuity rates do not fall, delaying annuity purchase can mean you have to live for a very long time to be better off. For more on this see our cost of delay section.
• You can shop around for the best annuity rate available on the open market when you come to retire. This can improve your income by as much as 30% when compared to rates offered from some pension providers.
• If you live for a long time, you can receive an excellent return on your investment. If you do not, you can select options from outset which will protect your spouse/ dependants if you pre decease them.
• An annuity gives you budgetary certainty- since you will know what your income will be in the future.
• Simplicity of taxation- annuities are taxed at source, under "Paye As You Earn". Hence in most cases there is no need to self assess.

Disadvantages:

• Your pension options are fixed at outset and cannot be altered to take account of changes in personal circumstances.
• Your annuity income cannot be altered in value (except for standard increases from indexing payments) to take account of fluctuations in supplementary sources of income. Hence there is a limited amount of flexibility and control of your payments. For those retiring gradually by reducing their working hours, or for those who wish to control their income for tax reasons this can be problematic.
• An annuity would represent poor value for money should you die early, depending on what death benefits you took out at the time of annuity purchase.
• The income you receive is dependent upon annuity rates at the time of purchase and since these fluctuate they cannot be predicted.
• There is no possibility of benefiting from future investment returns with a conventional annuity. However, you can select with profits annuities or unit linked annuities where future returns can reflect growth in underlying invested assets.
• If your state of health deteriorates after taking out a conventional annuity, you cannot reverse the decision to buy one and re-write it as an impaired life annuity, even if you would now qualify for impaired rates.
• If annuity rates imparove in the future, you cannot unravel the annuity and re-write it to take advantage of more generous terms.